If an advertising agency produces catalogs for a tax-exempt customer, does the customer's exemption cover the agency's purchases of photography, film production, and printing?

Plain-English summary

An advertising agency contracts with vendors for photography, film production, and printing to produce catalogs for its customers, and it pays sales tax on those purchases. Its representative asked: if the customer who buys the finished catalogs is a tax-exempt entity, does that exemption extend to the agency's purchases of the photography, film, and printing used to make them? The Department's answer: no.

Why. The agency is the consumer of the tangible personal property and services it must buy to complete a catalog-production project. As the consumer, it owes sales tax on those purchases. A customer's exempt status attaches to the customer's own purchases, not to the inputs an intermediary buys to perform the work. Once the agency pays that sales tax, it simply becomes part of the agency's costs in completing the project for its customer.

What this means for you

Advertising agencies, print brokers, and creative shops

When you buy photography, film, printing, or similar inputs to produce a deliverable (a catalog, brochure, campaign), you are the consumer of those inputs and owe sales tax on them — regardless of whether your end client is tax-exempt. Build that tax into your project cost.

Tax-exempt organizations buying finished work

Your exemption covers what you purchase directly. It does not pass through to the vendor's or agency's upstream purchases of the materials and services used to create your item.

The "consumer vs. reseller" line

The result would differ only if the agency were reselling identical property and could document a resale — but here the agency consumes the photography, film, and printing to produce the catalog, so those inputs are taxable to it.

Common questions

Q: Our client is tax-exempt. Can we buy the photography, printing, and film for their catalog tax-free?
A: No. The Department ruled the agency is the consumer of those inputs and owes sales tax on them; the client's exemption doesn't extend to the agency's purchases.

Q: What happens to the tax the agency pays?
A: It becomes part of the agency's cost of completing the catalog project for the customer.

Q: Would anything change if the customer weren't exempt?
A: The agency still owes tax on its input purchases as the consumer; the customer's tax status doesn't determine the taxability of the agency's own purchases.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it illustrates how the Department treats an agency's purchase of production inputs.

Citations and references

• Consumer rule — the advertising agency is the consumer of the photography, film production, and printing it buys to produce catalogs, so those purchases are taxable to the agency.
• No exemption flow-through — a catalog customer's tax-exempt status does not extend to the agency's upstream input purchases.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-006

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 10, 2003

XXXX
XXXX
XXXX

Re: Private Letter Ruling

Dear XXXX:

This letter responds to your correspondence dated November 11, 2002 on behalf of your client, XXXX, an advertising agency. I apologize for the delay in my response. You indicate that XXXX contracts with vendors for photography, film production and printing in the production of catalogs for its customers, and XXXX pays sales tax on these purchases. In your letter, you ask: "If the purchaser of catalogs from XXXX is a tax-exempt entity, does the tax exemption extend to products purchased by XXXX for production of the catalogs, such as photography, film production and printing?"

The answer is, no. XXXX is considered the consumer of the tangible personal property and services that it must purchase in order to complete a catalog production project, and XXXX therefore would owe sales tax on those purchases. Those sales taxes, once paid by XXXX, become part of XXXX's costs in completing the project for its customer.

This private letter is based on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Please let me know if have additional questions.

Very truly yours,

Richard L. Cram

Date Composed: 03/05/2003 Date Modified: 03/05/2003

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